Cleantech: Venture Capitalists Seek To Lower Risk

Clean technology businesses attracted attention and money in 2010 despite the shallow pitch of the larger economic recovery. Most experts predict 2011 will also be a strong year for the cleantech sector, but they say the organizations investing—and the types of innovations they will fund—are likely to change.

By the end of the third quarter of 2010, venture capital investment in companies advancing solar, biofuel, battery, smart-grid, and other environmentally friendly technologies had totaled $5.7 billion, according to the Cleantech Group. The research firm forecast that the year’s total would significantly surpass the $5.6 billion raised in 2009.

Venture capitalists are not the only ones putting money in cleantech. Increasingly, governments, corporations, and even large pension funds are buoying the fortunes of cleantech firms. Spending from the American Recovery & Reinvestment Act of 2009 made 2010 a great year for cleantech, says Michael Holman, research director at Lux Research.

In fact, the relative importance of traditional venture capitalists will fade in coming years, Holman says. “You will see a collapse in venture capital spending in cleantech,” he predicts. Recent initial public offerings of stock, such as for biofuels firm Amyris, did not result in the giant investor payday that software and Internet firms can bring. And the pace of cleantech IPOs is likely to stay slow in 2011.

In contrast, Dallas Kachan of consultancy Kachan & Co. says growing demand from China for raw materials is one of several reasons that venture investors will stick with cleantech. Kachan names resource scarcity, the drive for efficiency, the desire for energy independence, and even climate change as reasons to invest.

In 2010, renewable chemicals firms stole the spotlight from biofuels firms. Start-up Genomatica, which makes chemical intermediates such as 1,4-butanediol from sugars, raised $15 million in a third round of venture funding in March and is now looking for corporate partners as it moves from pilot to demonstration-scale production this year. “In 2011, you’ll see more companies moving forward with demonstration projects, pointing ahead to commercialization in the next one to three years,” CEO Christophe Schilling says.

For earlier-stage firms, Holman predicts venture investors will take a pass on novel technologies in favor of those with low capital requirements and less risk. They will favor markets such as energy efficiency, smart-grid software, and materials that enhance the performance of current solar and battery technologies.

Regionally, “China’s priorities will rule,” Holman asserts. “China has been a huge player in fields such as batteries and solar cells as a manufacturer. Now, we’ll see it play more of a role as a technology developer and a consumer.”